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How do you enter stops and keep them from getting purposefully taken by Market Makers?

Through interchanges on the old SCAN forum during the past few months I have been persuaded (mostly by MarkD and BobV) that it is a good idea to enter Stop loss orders. So, I am just about ready to start doing that again.

The problem is that the last time I did that it appeared that market makers went down and grabbed my stop. How do you go about entering a stop and keep it from getting purposefully taken by Market Makers?

Do you leave your broker software loaded at all times?

Best Answer

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    markdmarkd mod
    Answer ✓
    Just a few thoughts:

    No matter how good you are at placing stops, once in a while you will get stopped out on what turns out to be a winning trade. That's just the way it is. It is a cost of doing business. Nothing says you can't get back in if you believe in the trade (meaning, you have strong evidence, not that you have blind faith).

    If it happens consistently, here are some things to consider:

    Whether it's a market maker or others driving price toward the stops, it has to be worthwhile for them to do so. So when it happens, we know that the potential reward for using the resources to drive prices toward the stops is larger than the resources required. Knowing that, we can guess that, unless we are trading in significant size, they are not after our particular stop. There must be A LOT of stops nearby.

    I am guessing that happens when technical traders see a signal (like a MACD or Stochastics crossover), they all jump in together, especially if they are using default parameters. Naturally, they all place their stops together, too, probably within pennies of each other. So there's a large pool of liquidity if you can just get to it. If you have the resources, and you know the stock is ready to go up, wouldn't it make sense to get more stock at a discount from the current price? It's not a conspiracy, it's rational market behavior, and it doesn't necessarily require inside knowledge.

    So how to avoid it? Don't trade thin stocks with default technical indicators; if you trade default technical indicators, even with more liquid stocks, wait for the reaction down to the stops to place your trade; or, on the signal place a buy order near where you would place stop; or, trade smaller positions with wider stops beyond likely reach of the stop hunters.

    Or, work out your own method that gets you in before the default indicators trigger.


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    What does this mean; it makes no sense to me: "... it appeared that market makers went down and grabbed my stop. " and "...keep it from getting purposefully taken by Market Makers?"
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    Market makers own a lot of stock and often will sell it quickly at a loss in order to drop the price of a stock down to trigger stop-loss orders which people have put in place. Once they have been able to buy at those low prices they then buy not only the cheap stop-loss orders but their own stock back at even lower prices. They end up winning and we end up losing.
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    Here is my understanding: Market Makers provide liquidity in a security especially thinly traded securities. It is what they agreed to do (not sure if by law). That is how you are able to trade just about anything. In order to ensure this liquidity, I believe Market Makers hedge their positions (this process I do not fully understand). I do not think Market Makers own stocks (as if they are traders). They may hold securities to provide liquidity. Market Makers are not the reason why prices rise or fall, which is what you seem to suggest. I am sure Market Makers make money, but that process I do not fully understand. I do not think they do it at your or my expense like triggering your stops. You might want to re-examine your understanding of this.
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    Thanks for your opinion.
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    Thank you MarkD. As usual, your comments provided great insight and answered my question very well. In the last 2 paragraphs you gave several suggestions as to how to avoid this phenomenon.

    A few years ago I was getting caught by trading thinly traded issues. Now insisting on 1 Million ave volume has gotten past that problem. I think the rest can be taken care of by trading on some not-so-common indicators and especially by watching increase in volume and well formed candle bodies.

    Thanks again. I have not figured out how to designate a comment as an answer. How do I do that?
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    Hi. All advice needs to be considered in it's appropriate context; in this case, trade duration and ticker liquidity, and also risk. As I've come to see it, stops are much more pertinent to day and swing trades, and to low liquidity ("thinly traded") positions.

    Stops are also beneficial to those who don't want to pay close attention to the trade. But every benefit comes at a cost.

    It helps me to think about *why* I'd place any kind of stop order, before I think about where (and when) to place it, and I try to comprehend what different forces might drive a bid to the stop level, and what it takes (costs) those forces to get there, and why they'd bother.

    I yearn to gain a better understanding of order flow between the closing and opening bells. Until then I don't use stop orders overnight. I'm not certain, but confident from experience that extended hour traders are aware of the pending orders and whether they are trailing or limited. Also I expect that those "traders" are more likely computers rather than humans making considered decisions.

    The only one thing I'm certain of in the capital markets is that not one single bit of it/them have any sympathy whatsoever for my personal situation; and that those who do have the resources to actually manipulate price movement have much more capacity to collaborate and deceive, for the purpose of protecting their much more vast interests.

    Short form: on a short term trade without other controlled risk management, an initial stop is placed with the order and monitored/updated throughout the trade. For longer term positions I set alerts.

    As always, it continues to be a process :)

    Best Wishes.
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    Budr: Thank you for these comments (advice). You have gleaned some useful insights from your experience. Yes, all of us who are improving along the way are learning from our experiences and those of others. Thanks for sharing yours here. Best wishes.
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